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This new edition of the leading text on business and government focuses on the insights economic reasoning can provide in analyzing regulatory and antitrust issues. Departing from the traditional emphasis on institutions, Economics of Regulation and Antitrustasks how economic theory and empirical analyses can illuminate the character of market operation and the role for government action and brings new developments in theory and empirical methodology to bear on these questions. The fourth edition has been substantially revised and updated throughout, with new material added and extended discussion of many topics. Part I, on antitrust, has been given a major revision to reflect advances in economic theory and recent antitrust cases, including the case against Microsoft and the Supreme Court's Kodak decision. Part II, on economic regulation, updates its treatment of the restructuring and deregulation of the telecommunications and electric power industries, and includes an analysis of what went wrong in the California energy market in 2000 and 2001. Part III, on social regulation, now includes increased discussion of risk-risk analysis and extensive changes to its discussion of environmental regulation. The many case studies included provide students not only pertinent insights for today but also the economic tools to analyze the implications of regulations and antitrust policies in the future. The book is suitable for use in a wide range of courses in business, law, and public policy, for undergraduates as well at the graduate level. The structure of the book allows instructors to combine the chapters in various ways according to their needs. Presentation of more advanced material is self-contained. Each chapter concludes with questions and problems.

Preface to the Fourth Edition

xvii

Introduction

1

(12)

The Rationale for Regulation and Antitrust Policies

2

(1)

Antitrust Regulation

3

(2)

The Changing Character of Antitrust Issues

4

(1)

Reasoning behind Antitrust Regulations

5

(1)

Economic Regulation

5

(3)

Development of Economic Regulation

6

(1)

Factors in Setting Rate Regulations

6

(2)

Health, Safety, and Environmental Regulation

8

(1)

Role of the Courts

9

(1)

Criteria for Assessment

9

(2)

Questions and Problems

11

(1)

Recommended Reading

11

(1)

Appendix

11

(2)

The Making of a Regulation

13

(46)

State versus Federal Regulation: The Federalism Debate

14

(5)

Advantages of Federalism

15

(1)

Advantages of National Regulations

16

(1)

Product Labeling Example

17

(1)

The Overlap of State and Federal Regulations

18

(1)

The Character of the Rulemaking Process

19

(5)

The Chronology of New Regulations

19

(5)

Nature of the Regulatory Oversight Process

24

(12)

The Nixon and Ford Administrations

24

(1)

The Carter Administration

25

(2)

The Reagan Administration

27

(1)

The Bush Administration

28

(1)

The Clinton Administration

28

(1)

The George W. Bush Administration

28

(1)

Regulatory Reform Legislation

28

(2)

Benefit-Cost Analysis

30

(3)

Discounting Deferred Effects

33

(1)

Present Value

34

(2)

The Criteria Applied in the Oversight Process

36

(3)

Regulatory Success Stories

36

(1)

Promotion of Cost-Effective Regulation

37

(1)

Distortion of Benefit and Cost Estimates

38

(1)

The Regulatory Role of Price and Quality

39

(1)

The Impact of the Oversight Process

39

(9)

The Cost of Regulation

40

(1)

Other Measures of the Size of Regulation

40

(5)

The Character of Regulatory Oversight Actions

45

(3)

What Do Regulators Maximize?

48

(3)

The Capture Theory

48

(1)

Other Theories of Influence Patterns

49

(1)

Comprehensive Models of Regulatory Objectives

49

(2)

Conclusion

51

(1)

Questions and Problems

51

(1)

Appendix: Trends in Regulatory Agency Budgets and Staff

52

(7)

I ANTITRUST

59

(296)

Introduction to Antitrust

61

(18)

Industrial Organization

62

(7)

Structure

63

(3)

Conduct

66

(1)

Performance

66

(2)

Government

68

(1)

Antitrust

69

(7)

Federal Antitrust Laws

69

(2)

Enforcement and Remedies

71

(4)

Exemptions from Antitrust

75

(1)

Summary and Overview of Part I

76

(1)

Appendix: Antitrust Statutes

76

(3)

Sherman Act

76

(1)

Clayton Act

77

(1)

Federal Trade Commission Act

78

(1)

Efficiency and Technical Progress

79

(22)

Economic Efficiency

79

(14)

Partial Equilibrium Welfare Tools

80

(2)

Monopoly-versus-Competition Example

82

(2)

Oil Industry Application

84

(1)

Some Complications

85

(3)

X-Inefficiency

88

(1)

Monopoly-Induced Waste

89

(1)

Estimates of the Welfare Loss from Monopoly

90

(3)

Technical Progress

93

(5)

Importance of Technological Change

93

(2)

A Model of R & D Rivalry

95

(3)

Summary

98

(1)

Questions and Problems

99

(2)

Oligopoly, Collusion, and Antitrust

101

(54)

Game Theory

101

(5)

Example 1: Advertising Competition

101

(2)

Example 2: Compatibility of Standards

103

(1)

The Strategic Form of a Game

104

(1)

Nash Equilibrium

105

(1)

Oligopoly Theory

106

(10)

The Cournot Solution

106

(6)

Other Models of Oligopoly

112

(1)

Product Differentiation

113

(3)

Collusion

116

(18)

A Theory of Collusion

117

(4)

Challenges to Collusion

121

(7)

Collusion in Practice

128

(6)

Antitrust Law and Policy toward Price Fixing

134

(16)

Economic Analysis of Legal Categories

135

(2)

Per Se Rule Cases

137

(3)

Tacit Collusion

140

(4)

Enforcement Policy

144

(6)

Summary

150

(1)

Questions and Problems

151

(2)

Appendix

153

(2)

Game Theory: Formal Definitions

153

(2)

Market Structure and Strategic Competition

155

(48)

Market Structure

155

(19)

Concentration

155

(7)

Scale Economies

162

(2)

Entry Conditions

164

(10)

Dominant Firm Theory

174

(8)

Static Analysis

174

(3)

Dynamic Analysis: Limit Pricing

177

(5)

Strategic Competition

182

(12)

Limit Pricing

183

(7)

Investment in Cost-Reducing Capital

190

(4)

Raising Rivals' Costs

194

(1)

Preemption and Brand Proliferation

194

(4)

Summary

198

(1)

Questions and Problems

198

(5)

Mergers

203

(32)

Antitrust Laws and Merger Trends

204

(3)

Reasons for Mergers

207

(3)

Monopoly

207

(1)

Economies

207

(1)

Reducing Management Inefficiencies

208

(2)

Horizontal Mergers

210

(19)

Benefits and Costs

210

(9)

Effects of Airline Mergers

219

(1)

Cases

220

(5)

U.S. Department of Justice Merger Guidelines

225

(4)

Conglomerate Mergers

229

(3)

Potential Benefits

229

(1)

Anticompetitive Effects and Cases

230

(2)

Summary

232

(1)

Questions and Problems

233

(2)

Vertical Mergers and Vertical Restraints

235

(58)

Vertical Mergers

236

(21)

Benefits

237

(4)

Anticompetitive Effects

241

(5)

Commitment and the Restoration of Market Power

246

(2)

Raising Rivals' Costs

248

(5)

Antitrust Law and Policy

253

(1)

Historical Development

254

(1)

Time Warner and Turner

255

(2)

Vertical Restraints

257

(31)

Exclusive Dealing

258

(5)

Antitrust Law and Policy

263

(3)

Tying

266

(9)

Modern Theories of Leveraging

275

(7)

Manufacturer-Retailer Restraints

282

(6)

Summary

288

(1)

Questions and Problems

289

(4)

Monopolization and Price Discrimination

293

(62)

Establishing Monopolization Claims

294

(5)

Measuring Monopoly Power

294

(4)

Assessing Intent to Monopolize

298

(1)

Development of Antitrust Case Law

299

(6)

1890--1940: Standard Oil and United States Steel

299

(1)

1940--1970: Alcoa and United Shoe Machinery

300

(3)

1970 to Present: Kodak, IBM, Microsoft, and Others

303

(2)

Predatory Pricing

305

(17)

Theories of Predatory Pricing

309

(7)

Efficiency Rationales

316

(1)

Antitrust Policy

317

(1)

The Areeda-Turner Rule and Other Single-Parameter Rules

317

(2)

The Brooke Case and the Two-Tier Rule

319

(2)

Recent Developments

321

(1)

Refusal to Deal and the Essential Facilities Doctrine

322

(10)

Essential Facilities Doctrine

323

(1)

Intellectual Property Rights

324

(2)

Kodak and Monopoly Power in Aftermarkets

326

(6)

Microsoft Case

332

(11)

Network Externalities

332

(4)

Antitrust Case

336

(2)

Tying and Monopolization of the Browser Market

338

(1)

Maintenance of Monopoly in the Operating Systems Market

339

(3)

Remedies and Harm

342

(1)

Price Discrimination and the Robinson-Patman Act

343

(9)

Systematic Discrimination

344

(5)

Unsystematic Discrimination

349

(1)

Cases

350

(2)

Summary

352

(1)

Questions and Problems

352

(3)

II ECONOMIC REGULATION

355

(334)

Introduction to Economic Regulation

357

(44)

What Is Economic Regulation?

357

(1)

Instruments of Regulation

358

(4)

Control of Price

358

(1)

Control of Quantity

359

(1)

Control of Entry and Exit

359

(1)

Control of Other Variables

360

(2)

Brief History of Economic Regulation

362

(7)

Formative Stages

362

(2)

Trends in Regulation

364

(5)

The Regulatory Process

369

(6)

Overview of the Regulatory Process

369

(2)

Regulatory Legislation

371

(1)

Independent Regulatory Commissions

371

(2)

Regulatory Procedures

373

(2)

The Theory of Regulation

375

(21)

Normative Analysis as a Positive Theory

376

(3)

Capture Theory

379

(1)

Economic Theory of Regulation

380

(12)

Testing Theories of Regulation

392

(4)

Summary and Overview of Part II

396

(1)

Appendix

397

(2)

A Theory of Interest Group Competition

397

(2)

Questions and Problems

399

(2)

Theory of Natural Monopoly

401

(28)

The Natural Monopoly Problem

401

(7)

Permanent and Temporary Natural Monopoly

402

(2)

Subadditivity and Multiproduct Monopoly

404

(4)

Alternative Policy Solutions

408

(15)

Ideal Pricing

409

(12)

Franchise Bidding

421

(1)

Actual Solutions

421

(2)

Summary

423

(1)

Appendix

423

(2)

The Troublesome Case of a Natural Monopoly

423

(2)

Questions and Problems

425

(4)

Natural Monopoly Regulation and Electric Power

429

(36)

Traditional Rate-of-Return Regulation

430

(6)

The Rate Case

431

(2)

Averch-Johnson Effect

433

(3)

Incentive Regulation

436

(7)

Performance Standards

436

(1)

Earnings Sharings

437

(2)

Price Caps

439

(3)

Yardstick Regulation

442

(1)

Rate Structure

443

(4)

FDC Pricing

443

(2)

Undue Discrimination

445

(2)

Peak-Load Pricing

447

(6)

Costs of Power Production

447

(2)

Peak-Load Pricing Model

449

(4)

Regulation and Restructuring of Electric Power

453

(8)

Historical, Technological, and Regulatory Background

453

(2)

Overview of Recent Legislation

455

(1)

Restructuring in California

456

(5)

Summary

461

(1)

Questions and Problems

462

(3)

Franchise Bidding and Cable Television

465

(38)

Theory of Franchise Bidding

465

(14)

Competition at the Bidding Stage

467

(8)

Contractual Arrangements for the Postbidding Stage

475

(3)

Assessment of Franchise Bidding

478

(1)

Cable Television

479

(20)

Historical/Regulatory Background

480

(1)

Cable Television as a Natural Monopoly

481

(4)

Franchising Process

485

(2)

Assessment of Franchise Bidding

487

(5)

Rate Regulation

492

(5)

Is There a Role for Government Intervention?

497

(2)

Summary

499

(1)

Questions and Problems

500

(3)

Public Enterprise

503

(20)

General Background

504

(1)

Positive Theory of Public Enterprise

505

(7)

Managerial Model of a Firm

506

(1)

Managerial Model of a Private Enterprise

507

(1)

Managerial Model of a Public Enterprise

508

(2)

Comparison of Public and Private Enterprise

510

(2)

Municipal Electric Utilities

512

(4)

Pricing Behavior

512

(1)

Allocative Efficiency Comparison

513

(2)

Productive Efficiency Comparison

515

(1)

Assessment of Private versus Public Utilities

515

(1)

Airlines

516

(1)

Privatization

517

(4)

Summary

521

(1)

Questions and Problems

522

(1)

Dynamic Issues in Natural Monopoly Regulation: Telecommunications

523

(32)

Transformation of a Natural Monopoly

523

(21)

Basis for Natural Monopoly Regulation

524

(3)

Sources of Natural Monopoly Transformation

527

(2)

Regulatory Response

529

(5)

Intercity Telecommunications Market

534

(10)

Telecommunications Act of 1996

544

(2)

Separation of Regulated Monopolies and Competitive Markets

546

(5)

Benefits and Costs of Separation

547

(3)

Breakup of AT&T

550

(1)

Summary

551

(2)

Questions and Problems

553

(2)

The Regulation of Potentially Competitive Markets: Theory and Estimation Methods

555

(34)

Theory of Price and Entry/Exit Regulation

556

(16)

Direct Effects of Price and Entry/Exit Regulation: The Competitive Model